WIGGLING IN SUN VALLEY

Irwin Stelzer, one of Mr Murdoch's

associates who listened to Mr Brown, was unpersuaded

New York BY suggesting that the Prime Minister's increasing support for British participation in European monetary union makes him the most dangerous man in Britain, the Sun succeeded in doing what the Times, the Telegraph, the Independent, the Guardian, the Daily Mail and the Financial Times had failed to do — move the debate over monetary union to centre stage.

Then Rupert Murdoch's invitation to the Chancellor to address News Corpora- tion's thrice-yearly management meeting attracted attention to the issue. The anti- Murdoch press, eager to be spun by Gor- don Brown's spinmaster, reported that brave Brown had told Murdoch and his merry band of editors, journalists and executives that he and the Prime Minister remained four-square behind Britain's abandonment of the pound in favour of the euro.

He would, wouldn't he? I was at the Sun Valley conclave. Since it was broadcast live via television satellite hook-up, and widely disseminated to the press, it is not telling tales out of school to say that Brown's speech bore not the slightest resemblance to the headlines it generated in the press. Brown repeated his long-held position that he found nothing objectionable in princi- ple to monetary union.

There was nothing either new or startling except to a press corps eager to accept Charlie Whelan's Daniel-in-the- lion's-den spin on the occasion, as most hacks were. This was a disservice to Brown's intellectual seriousness and to the nation's need for a reasoned debate on Britain's future relationship to a Europe that has decided that a single currency is essential to its future peace and prosperity.

This issue, like the sovereignty question, Is often confusea by summarising it as being a question of joining only if mone- tary union 'works'. It is the vagueness of the latter question that led Derek Draper astray in these pages (23 May) when he adopted the Peter Mandelson line that 'a flip-flop is inevitable', prompting the head- line, 'Why Murdoch's Sun will shine on the euro'. This because Mr Murdoch had won- dered aloud to his staff, 'What if it works?' Actually, the Sun's proprietor has repeat- edly said that if the single currency works, he would have to re-examine his opposi- tion. Churchill once wrote of passing 'with relief from the tossing sea of Cause and Theory to the firm ground of Result and Fact.' That's how practical men think. And the Prime Minister is as tough-minded and practical a politician as Murdoch is a busi- nessman. Like Murdoch, Blair has always said that Britain should join monetary union only if that new system works, and, adds the Prime Minister, only if he is able to persuade the British people that he is correct in that appraisal.

What does 'works' mean? It is clearly in the government's interest to keep the con- tent of that word as obscure as possible, to give it what we Americans call 'wiggle room'. There can be little doubt that the Chancellor leans in the direction of join- ing, as does an only slightly more sceptical Prime Minister. Their hope is that in the early years of its operation monetary union will 'work', or at least can be said to 'work'. So why give hostages to fortune by defin- ing in advance just what would satisfy them? Such vagueness is certainly a sensi- ble political strategy — far more sensible than offering specific quantitative mea- `This is my wife – she's checking you're ugly enough.' sures, now, by which the success of EMU can be measured by the voters in the run- up to the next general election.

But its utility as a political strategy should not let it go unchallenged by those who would like to know just what tests the government will apply when deciding to advise the electorate that monetary union has worked, or has not.

In his spirited talk in Sun Valley, the Chancellor spoke of enabling Britain to 'influence the course of the European debate'. The government has insisted all along that by keeping an open mind on the question of British entry into monetary union it will receive a more cordial hearing for its views on all European issues in which Britain has a stake. By replacing Lady Thatcher's long spoon with a shorter one when supping with other members of the European Union, Tony Blair hoped to increase the receptivity of France and Ger- many to labour-market reform, a reduction of the tax burden borne by employers, and freer trade.

There can be little question that the Prime Minister succeeded in making the dinners he laid on for his EU counterparts in Canary Wharf and Cardiff more pleas- ant than those at which Lady Thatcher wielded her legendary handbag or John Major poured fudge over the tough issues. But, to put it crudely, so what? What did Blair and Brown accomplish by their will- ingness to keep an open mind on British entry — indeed, to go so far as to praise the concept of monetary union, as the Prime Minister did so effusively at the Cardiff meeting?

Very little, it would seem. The German Chancellor, Helmut Kohl, and the French Prime Minister, Lionel Jospin, didn't hesi- tate to embarrass Blair by first brawling over the selection of the president of the European Central Bank, and then blaming the fiasco on a lack of pre-meeting prepa- ration by the British Prime Minister, then also the EU president. And in response to Britain's preaching a more open labour market, Jospin went right ahead with his plans to shorten France's work week, with no reduction in pay. Nor has France rewarded Britain's congeniality by becom- ing more receptive to freer trade: whether it is bananas or films, France refuses to allow free markets, aka 'the law of the jun- gle', to hold sway.

An even bigger failure of the be-polite- to-the-single-currency strategy was the humiliating exclusion of the Chancellor from the deliberations of the meetings of the finance ministers of the 11 Euroland nations. This body, known variously as Euro-X and Euro-11, is clearly growing in policy-making importance as a rival to the gatherings of EU finance ministers, and Brown coveted a seat at the table, a prize he hoped would be his as a reward for the government's shift from the Tories' Eurosceptical tone to Labour's more Euro- friendly position. Brown might take some solace from the fact that although the 'offi- cial' languages of the ECB and the Euro-X ministers remain their native tongues, the recognised 'communications' language of Euro-X and the European Central Bank — the one language all participants under- stand — is English. But knowing that his language is the language of international business must be small compensation to the Chancellor for being unable to hear what is said at the meetings from which he is barred.

Nor did the government's abandonment of the Tories' relatively hostile attitude towards monetary union earn it another of the principal prizes the Chancellor has sought — greater transparency. Brown has argued quite persuasively that transparen- cy about government finances and the con- dition of its banks might have averted the recent Asian economic meltdown. And he is persuaded that democratic support for the economic policy-making institutions of Europe will be furthered if those institu- tions come out from closed meeting-rooms into the light of public and press scrutiny. So he must have been delighted when the new European Central Bank agreed to publish its minutes — although I suspect that the 16-year time lag suggested by ECB president-designate Wim Duisenberg for such publication was a bit of a disap- pointment to him.

In short, if by 'working' the government means that its more genial attitude towards monetary union was designed to allow Britain to 'influence the course of the European debate', it is difficult to see how its policy towards monetary union is 'working'. Of course, there is a possibility that the current members of EMU will begin wooing Britain when the time for its decision concerning entry comes closer, and that Britain's ability to influence poli- cy in euroland will then increase from its current negligible level. After all, the new currency needs the blessing of Europe's premier financial centre every bit as much as — Eurosceptics would say more than — Britain needs the Euro-11.

Which brings us to the question of sovereignty. For those like Michael Por- tillo, for whom the surrender of the pound is, in principle, an unacceptable surrender of Britain's control over its own affairs, there is no need to see if the euro is 'work- ing'. But for those, like the Prime Minister, who see no surrender of principle involved in abandoning the pound, there remains the question of whether the euro is work- ing as it relates to sovereignty.

It is not for an American to tell the British just how much sovereignty they should be willing to surrender. But it seems not at all inappropriate for an economist, no matter what his nationality, to lay out the analytical framework for estimating the likely extent of such surren- der under various economic conditions. The Chancellor calls surrendering control over interest rates an acceptable pooling, rather than an unacceptable loss, of sovereignty. Presumably, if the single cur- rency 'works', no further loss of control over the nation's economy will be required.

Assume for the moment that transfer- ring power to set interest rates from the Bank of England to the European Central Bank does not cross the line between sur- render and pooling. No easy assumption that, since the gnomes of Frankfurt will be determining the mortgage payments of British nationals, not to mention the cost of debt capital to British businesses.

But let's concede for purposes of argu- ment that monetary union can fairly be said to be 'working' if the power to set interest rates, but no other substantial eco- nomic power, moves from London to Brussels, or Frankfurt.

We then have another way of testing just how well the single currency is working, come referendum time. The Prime Minis- ter has argued, sincerely and with persua- sive passion, that . he is a British patriot, and the Chancellor repeated in Sun Valley that he will act in the national interest, which can't possibly mean defining pooling to include still greater surrender of control over the economy to unaccountable Euro- pean bureaucrats and technocrats.

This means that the euro cannot be said to be working if it involves surrender of more sovereignty than the government now declares to be acceptable. If, for example, the euro can become and remain viable only if interest-rate uniformity is fol- lowed by tax harmonisation, monetary union cannot be said to be 'working', in the context of appraising its success against the extent of the sovereignty that must be surrendered or pooled. Unless, of course, the government chooses to reverse its cur- rent position, and argue that it is accept- able for a British patriot to surrender control of fiscal and tax policy in addition to what is now contemplated, loss of con- trol of interest rates.

That there is a possibility of further ero- sion of sovereignty there can be little doubt. For one thing, Dominique Strauss- Kahn, France's finance minister and the dominant voice in Euro-X, is already pressing its members to 'co-ordinate' their tax policies to stop 'unfair competition'. That's Eurospeak for saying that Britain must raise its taxes to French levels if it is to join EMU.

For another, if the ECB opts for interest rates low enough to stimulate the French and German economies sufficiently to cut into those countries' double-digit unem- ployment rates, those lower interest rates might very well trigger inflation in the UK (not to mention Ireland, Finland, Spain, Portugal and the Netherlands). To keep within the inflation limits required of EMU members, Britain might find itself forced to raise taxes. Or, should the Chan- cellor follow through on his announced plan to increase spending at a real rate of 2.75 per cent per year, but find tax rev- enues dropping as the economy cools, he might end up running a deficit in excess of the EMU limit of 3 per cent of GDP. He would then have to cut social spending or raise taxes in the teeth of a recession, or pay a huge fine to his EMU partners.

Indeed, it is just this further centralisa- tion of economic power in the hands of Brussels-Frankfurt that so many Europhiles find attractive. But the dire predictions of most economists may prove wrong, and control over monetary policy by the ECB may prove all that is required to make the euro a stable, viable currency. If so, the government can rightfully claim, in the run-up to the promised referendum, that the euro is working — at least as regards the sovereignty question.

The good news is that this test of whether the euro is working is rather transparent. If Britain is forced to raise taxes in order to join — to harmonise its tax rates with those of the Euro-11, or to avoid exceeding the deficit limit, or to fund regional income transfers to countries hav- ing difficulty maintaining their extensive social welfare programmes within the fiscal constraints imposed by the European Cen- tral Bank — the government will be hard- pressed to contend that the new currency is 'working'.

Which brings us to the economic tests of whether monetary union is successful enough to make British membership in the nation's interest. The Prime Minister has said that he will deem the euro to be 'working' if it proves to be a stable curren- cy. But it is safe to assume that stability bought at the price of persistent high unemployment would be unacceptable. So what are the tests of 'working'?

The Chancellor has posed several. In his Sun Valley presentation to an audience that included American executives with less interest in the question of British membership in EMU than in the likely impact of digitalisation on the future of the television industry, and more than a few Eurosceptic British journalists and executives, Brown referred to the five eco- nomic tests he laid out last year, all of them allegedly 'clear and unambiguous'. In the course of his testimony before the Treasury Committee he added several more.

Some are easy to handle: monetary union should lower transaction costs, as the Chancellor predicts. This is measur- able with an acceptable degree of preci- sion. But whether those savings will offset the costs of adapting computer pro- grammes, resetting cash machines, and the other costs of converting from pounds to euros — estimated at between £1.7 and £3.4 billion for retailers alone — remains to be seen. Fortunately, these costs can be measured, even if only roughly.

Not so the Chancellor's insistence that Britain will join only if its economy and that of euroland 'converge': it will be impossible to test convergence in the few years between the introduction of the euro and the next general election, since deter- mining whether such a test has been met requires studying data over a complete business cycle. So in practice the conver- gence test will mean whatever Gordon Brown chooses it to mean — neither more nor less. But scope for wiggling can be reduced by prising from the Chancellor some indication of just how close the vari- ous economic indicators for Europe and Britain must come to warrant clinking of champagne glasses and a toast to 'conver- gence'.

The remaining tests posed by the Chan- cellor — the effect on investment, employ- ment and the financial services industry — are capable of acceptably precise applica- tion. For example, if, during the next sev- eral years, Britain remains the nation of choice for overseas investors, it would seem reasonable to argue that such inflows prove that Britain's failure to join EMU has not diminished, and may well have enhanced, its attractiveness to foreign investors. Is the government prepared to say, now, that if the flow of inward invest- ment coming to Britain, as compared to that going to euroland, remains at present levels or increases, EMU is not 'working'?

Similarly with employment. Britain's unemployment rate is now about half that of France's, and 60 per cent that of Ger- many's. These are easily obtained, mean- ingful, published figures. Is the government prepared to say, now, that if that gap persists, the euro is not 'working'?

As for the role of London as a financial centre, it is relatively easy to compare the volume of transactions handled and the jobs provided in the City with similar data for Frankfurt, Paris and other euroland wannabe financial centres. Is the govern- ment willing, now, to concede that, if Lon- don holds its own against these upstarts, other things being equal, the euro is not attracting financial services away from London, and therefore is not 'working' as its advocates claim it will?

In short, all the government's stated pre- conditions for entry remain unsatisfyingly vague. One is reminded of the crap game in Guys and Dolls. Big Julie, the visiting thug-gambler, decides that he has lost enough, and forces the players to use his dice, which are blank on all sides. Only he knows what each throw of the blank dice brings. Needless to say, he always wins. The government wants to play with Big Julie's dice. It shouldn't be allowed to do so.

There are precedents for the govern- ment to state in advance and with numeri- cal specificity what its criteria for a successful EMU are, rather than leaving the debate in the state described by the House of Commons Treasury Committee: 'Both the Chancellor's statement and the accompanying HM Treasury analysis dis- cuss the benefits which might accrue to the United Kingdom from joining a "success- ful" EMU without defining how the suc- cess of the project would be judged.'

The government did not hesitate to reveal the precise number of students per class that is the goal of its education policy (30 or fewer for five-, six- and seven-year- olds); or the number of additional patients it planned to have the NHS treat (100,000); or the number of under-25s it plans to get off the dole (250,000); or its precise spending limits.

But when it comes to the standards that it will use to decide whether monetary union is working, it retreats into vague generalities; no quantification of just how small the differences in inflation, interest and unemployment rates must be between Great Britain and euroland for there to be 'convergence'; no quantification of the extent of exchange-rate fluctuations that will permit it to declare the euro a 'stable currency'; no indication of just how many workers must move between countries for labour markets to be declared sufficiently 'reformed' and 'flexible' to attract British membership.

Come referendum time, the government — and all odds are that it will still be the government — will, short of a major Euro- pean depression, be able to declare that the euro 'works'. The Leader of the Oppo- sition seems more intent on rooting out that dire threat to the country, a braggart lobbyist who should have known better babbling to a reporter cited as unreliable by an American judge. Surely, Prime Min- ister's Question Time would be better and more seriously spent in trying to get the government to lay out its criteria for declaring that the euro is working than in forcing it to defend itself against ill-found- ed charges of cronyism. After all, William Hague has said, 'I want to see whether it works before anyone bets Britain's entire economy on joining.' I wonder what he means by 'works'?